320 Chapter 11Companies (2): Management, control and winding up
Floating charges
A company may grant more than one fixed charge on any particular asset.
Let us assume that a few years ago Runner Ltd borrowed £90,000 from the bank and
granted a fixed charge over the company factory, currently worth £2,000,000. If the company
now wanted to borrow a further £60,000 from a different creditor then that creditor would
be quite happy to register a second fixed charge on the company factory. If the company
does not repay its debts then the factory could be sold by the creditors. The bank would
be entitled to its £90,000 first because it was the first charge registered. But the sale of the
factory would easily realise enough to repay the second charge holder.
If, however, there were no assets on which a fixed charge could be secured the
creditor might be prepared to accept a floating charge. This means that the creditor
would take a class of, or all of, the company’s property, both present and future assets,
as security.
A floating charge does not attach to any particular items of property until it crystallises,
because it is recognised that the class of assets charged will change from time to time in the
ordinary course of the company’s business. It is also recognised that a floating charge does
not prevent the company from selling the assets over which it is granted. It is particularly
useful then when a company has a good deal of money tied up in raw materials, stock in
trade or book debts. A book debt is a debt owing to the company.Example
Let us assume that Speedy Ltd, which manufactures televisions, has already granted a fixed
charge over all those assets, such as its factory, which it does not need to sell. Let us further
assume that the company has a warehouse stocked with televisions ready for sale, that it is
owed money by various creditors and that it has a large stock of materials with which it
makes the televisions. None of these remaining assets could be the subject of a fixed charge
without crippling the company’s activities. The company would not be able to sell the
televisions already manufactured, or work the raw materials into televisions, without the
permission of the fixed charge holder. If such permission was granted the charge holders
would then lose their security.
But the finished televisions, the money owed and the raw materials are worth a great
deal. A creditor might well therefore take a floating charge over these assets, secure in
the knowledge that if the company did not repay him he could recoup his loan by calling
in the charge, selling the assets charged, and deducting what he was owed from the
proceeds.
If more than one floating charge is issued, the charges take priority in the order in
which they were created. Like a fixed charge, a floating charge must be registered with the
Registrar of Companies.Crystallisation of floating charges
A company can continue to sell assets over which a floating charge has been granted up
until the time of ‘crystallisation’. So in the example just considered, Speedy Ltd could still
sell the finished televisions, even though they were the subject of a floating charge. But
when crystallisation occurs the floating charge will become a fixed charge attaching to the
assets of the company charged at that time. This, of course, will mean that the company is
no longer free to dispose of the assets.